* Agencies working on legislation to govern OTC trade
* SEC may take charge of regulating CDS - source
* Merger between SEC, CFTC seen unlikely (Repeats item first filed on Wednesday)
By John Poirier and Rachelle Younglai
WASHINGTON, June 10 (Reuters) - The two primary U.S. financial market regulators are drafting legislation to implement the Obama administration's proposed crackdown on over-the-counter derivatives, said sources familiar with discussions at the agencies late on Wednesday.
In another sign that a merger is unlikely between the Securities and Exchange Commission and the Commodity Futures Trading Commission, the sources said the agencies could split oversight of OTC derivatives under the legal language they are working on for eventual submission to Congress.
The SEC, the larger and older of the two agencies, may take charge of regulating credit default swaps, a type of OTC derivative, for publicly traded companies, one source said.
The administration and congressional Democrats are working on tightening the rules for banks and markets to prevent a recurrence of the severe financial crisis that has been hammering economies worldwide for months.
On May 13, the administration proposed exerting more government control over the shadowy OTC derivatives market, which has widely been implicated in the credit crisis.
At that time, officials did not make clear which agency would be in charge of the crackdown. But it was clear that laws enforced by both the SEC and the CFTC would have to be amended to accommodate the administration's plans.
Since then, political obstacles in Congress and resistance from the agencies themselves have largely convinced lawmakers and the administration to back away from another financial reform idea -- merging the SEC and the CFTC.
A source familiar with the administration's thinking said a reforms package expected to be unveiled on June 17 by President Barack Obama will not include an SEC-CFTC tie-up.
But it will stress the need to bring the OTC derivatives market, now only loosely policed, under stricter regulation with more conservative capital, reporting and margin requirements for major participants.
In the United States, four large banks control over 90 percent of the derivatives market: JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N), and Goldman Sachs Group Inc (GS.N).
Trading in OTC derivatives, instruments that derive their value from other assets, exploded in size in recent years, with many large firms -- such as mega-insurer American International Group (AIG.N) -- charging into the burgeoning market.
A key feature of the administration's plan will be to move more OTC derivatives trades through central clearinghouses or, in the case of standardized instruments, onto exchanges.
Customized instruments unsuited to such treatment would be subjected to more record-keeping, under the proposed changes. (Writing by Kevin Drawbaugh; Editing by Lincoln Feast)